Wednesday, January 27, 2016

LOONY TUNES no. 126

“When InvisibleHand ads showup on your PC, will you be curious that what it is? Most of us will take it normal as it contains an updated link same as many other system report. Therefore, we prone to click it to update directly since it is complicated to turn to official sites. But just for a while, you will pay back for this laziness.

InvisibleHand belongs to adware infection dropped by freeware and spam email. As we all know, adware is kind of malware and it is notorious for its ads displaying function. It is able to infect all kinds of browsers, and enable ads on the browsers. In most of the cases, these ads are fabricated with the information that it steals from your online activities. It is inevitable for innocent users to click these ads.”

Comment

For believers in “invisible hands” (most modern economists) this is a timely warning. That this malware is so pevalent is the fault of all those perpetrators of the libel on Adam Smith that exploded across the profession after Paul Samuelson’s invented 1948 story about Adam Smith supposedly saying that “selfish acts” can lead to public benefits.

Sadly it was a load of tosh. As is the above computer programme. See: Kennedy, G. 2011: "Paul Samuelson and the Invention of the Modern Economics of the Invisible Hand", History of Economic Ideas, XVIII, (3) 105-19.

“The re-examination of a heretofore unenforced regulation like the FDA’s Draft Guidance on PSAPs, continued introduction and encouragement of lower-priced hearing aids, and even a limited OTC/DTC hearing aid class are good things for consumers. However, it should also be pointed out that Figures 1 and 2 don’t portray an industry that is stagnant or broken. Adam Smith’s “invisible hand” is already yielding positive pressure in terms of affordability and accessibility—and challenging economic weight on independent practices. If the FDA does decide to make regulatory changes, it must act carefully and not apply pressure that would ultimately crush professional hearing care.”

Wednesday, January 06, 2016

VISIBLE PRICES OPERATE MARKETS, NOT INVISIBLE HANDS

That, at least, was the argument of many economists grappling with the problem of climate change. As fossil fuels became scarcer, they pointed out, the price of oil and natural gas would go up. And then other options, like solar and wind, would become cheaper, particularly as investment flowed into that sector and drove down the cost of new technologies.

And voila: The invisible hand would gradually turn down the global thermostat.”

COMMENT

The above argument fails on its own grounds. It is based on the illusion that “an invisible hand” refers to markets. It does not and Adam Smith never asserted that it did.

Markets depend on prices and there is no role or need for “an invisible hand”.

Ask yourself: what does an “invisible hand” supposedly do that prices themselves cannot do? It is not a metaphor for price systems that operate in markets. For what then is it a metaphor? Adam Smith defined the role of metaphors in his “Lectures on Rhetoric and Belles Lettres” (1762-63) as describing its "object" in “a more interesting and striking manner” (p.29).

In Wealth of Nations ,he uses the metaphor to describe how a merchant is motivated by his feeling of insecurity to avoid sending his capital abroad and to invest it locally instead. His conscious intentional act also has unintentional consequences, specifically in this case that his invested capital adds to “domestic revenue and employment”, which was no part of his intention. This unintentional consequences was a public benefit.

Prices are visible and always must be. In fact, markets cannot work except by visible prices. Nothing more is needed. There is nothing ‘mystical’ or ‘miraculous’ about visible prices. Nor is there anything theological about the price system.

TO UNDERSTAND THE PRESENT, STUDY THE PAST

Excepting economics what subject do you [Boudreaux] feel is most important for economists to know better?

This question is a good one, and if it weren’t for its opening clause I would have answered “economics.” I’m not being smart-aleky. Too few economists know – really know – basic economics. A depressingly large number of economists, including even a few who boast Nobel Prizes, would learn a great deal of economics if they were to read and carefully study Alchian’s and Allen’s University Economics – or even if they were to take the time to read some classic articles by Alchian, Demsetz, Coase, Hayek, Buchanan, Yeager, and Vernon Smith. (Topping off the reading of articles by these economists with the reading of books by Schumpeter, Knight, Mises, Hayek, Buchanan, McCloskey, and Higgs would only further, and greatly, enhance their economic education.) These economists would encounter a method of analysis and way of thinking about the economy that, I’m quite sure, would challenge many of their core prejudices and significantly adjust, for the better, their perspectives.

But other than economics, the subject that I believe is not only most useful to economists, but indispensable, is history. It’s an easy call. The marginal intellectual return for a typical economist today to an extra month spent studying and pondering history would be multiple times greater than the return that that economist enjoys today by spending a month refining his or her technical expertise.

Comment

I agree with Professor Boudreaux that economists should study history.

In short, they should adopt Adam Smith's approach of locating their economics in history, even if it is modern history of the past 50 - to 100 years. This would be much more productive than hopelessly trying to predict the (near or distant) future, or worse, as moderns are wont to do, imagining that all people act like wholly rational beings who act like rational robots, maximising some invented self-interest shared by everybody else.

As for “basic economics”, which is fulll of imagined scenarios, perfectly formed functions, I am not sure that the economics they learn are of much use in trying to understand the real world. By all means learn about a rationally ruled world if you merely want to pass your exams. But don't expect to know much about the real worldwith real people interacting in it.

If you study Adam Smith's books, Moral Sentiments and Wealth of Nations, you will see how what we now call capitalism evolved in Northern Europe ('warts and all') and the extent to which human actions in all their variations eventually brought about the societies of today.

“Since the time of Adam Smith in the 1700s, economists have talked about the “invisible hand” of the market. It’s a powerful concept, and a useful one. But the idea that "the marketplace always operates perfectly has some very real limitations.”

Comment

Understanding Adam Smith is probably a more important necessity than understanding Psychology (the ‘wisdom of crowds’, etc.) given Susan Willett’s erroneous opening statement about Adam Smith.

FACT: “economists” have NOT ‘talked about the ‘invisible hand’ of the market” since “the time of Adam Smith in the 1700s”.

While Smith was alive (1723-90) there were no published comments by economists (or anybody else) and no evidence that anybody noticed, let alone “talked about the ‘invisible hand’ of the market”.

In fact, comments by anybody on Adam Smith’s reference to the “invisible hand” of the market were extremely rare while he lived (I have found no trace of any actual refreneces while he was alive) and very few after he died until the mid-20th century. I have traced one comment in the 1830, by the Scottish Presbyterian Minister, Thomas Chalmers, in the 1830s, unsurprisiingly in a wholly theological context, and only a handfull in the 1870s.

This paucity of references anywhere to Adam Smith’s single reference to “an invisible hand” in Moral Sentiments (1759) and also once only in Wealth of Nations (1776) is quite remarkable. Only after Paul Samuelson’s famous introductory textbook (Economics: an introductory analysis, McGraw Hill) was published in 1948 (and its 19 editions and 5 million sales to 2010) did 'the invisible hand' enter popular (and scientific!) discourse. From then on references to it became, first a trickle and then a flood. Today, references to Smith’s “invisible hand” of the market are in the Tsunami range.

Susan Willett's unfounded claim that “economists have talked about the “invisible hand” of the market” since “the time of Adam Smith” is, to say the least, unfounded and wholly untrue, betraying her actual knowledge of Adam Smith and the history of economic thought. to be very slim.

Moreover, Adam Smith never said anything about his use of the metaphor as referring to “an invisible hand’ of the market”. That bit of Susan’s article is wholly made up by modern epigones of Smith and believed who have never read him.

Lastly, Smith never said that ""the marketplace always operates perfectly". He was regularly critical of how "merchants and manufacturers" tried to manipulate markets for their own advantages.

“By re-examining Adam Smith’s theories as they were originally articulated, Gavin Kennedy, Emeritus Professor at Heriot-Watt University, Edinburgh, aims at nothing less than rescuing the authentic Smith from the distorted interpretations, assumptions and attributions of modern economists. Having in subsequent publications criticized scholars for partial and misleading citations from Smith’s work as a means of validating their own theories, it is a task Kennedy is eminently suited to perform.

With short, snappy chapters that are thematically and sequentially coherent, Kennedy seeks to demonstrate that Smith’s original message was very clear but has been misused by ideologues of the Right and more surprisingly perhaps, also the Left. Judicious citations from Smith’s The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776) provide a compelling dynamic to Kennedy’s narrative. The former was an essential conceptual and philosophical link towards the latter, and with his moral philosophy in mind, Kennedy claims Wealth of Nations as a philosophical treatise rather than an economics textbook, for Smith “directed his intellectual output at emphasising the mutuality of human conduct through chains of exchange relationships arising from the dependence of each person in society on the services of many independent others” (p.18).

Consequently, Smith’s earlier work developed ideas of empathy, interdependence, and harmony of interests, and how these values played out in society were highly significant in underpinning Smith’s political economy. The author considers the passage relating “the propriety of generosity and the deformity of injustice” vitally important in countering the misinterpretations of those who argue that Smith preached the supremacy of self-love and self-interest, and that his fundamental doctrine was “greed is good” (p.137). Kennedy devotes considerable time developing and demonstrating two fundamental points. Firstly, that Smith was neither the purveyor of pure laissez-faire nor the ideological forerunner of the neo-classical Chicago School and secondly that he advocated a fairer, equitable society, based not on redistributive mechanisms but by sharing future affluence from economic growth and higher employment…”

[To read the full review, follow the link]

Comment

Gordon Bannerman’s review in Simply Charlie is the most accurate representation of what I attempted to achieve when I wrote my contribution to the ‘Great Thinkers in Economics’, series that was edited by Professor A. P. Thirlwall for Palgrave-Macmillan.

I strongly recommend that readers of Lost Legacy follow the link and read the full review or email me at: gavink9@gmail.comNote:ON AMAZON TODAY (3 JANUARY 2016), COPIES OF THE PAPERBACK: “Adam Smith: A Moral Philosopher and His Political Economy” by Gavin Kennedy (Palgrave-Macmillan) 2010 ARE SELLING OF THE 2ND EDITION (REVISED), FROM £5.58 (post free). Palgrave Retail price is c.£18.

Saturday, January 02, 2016

THE TSUNAMI OF MODERN REFERENCES TO THE INVISIBLE HAND

“Then there’s his [Adam Smith’s] famous idea of the invisible hand of the market. The invisible hand phenomenon is the natural correcting of prices and quality that choice brings to the market. The best products will be purchased more than poor products. Prices for better products will rise, but as soon as they get too high the products will stop being purchased. This natural limit on pricing keeps producers honest. It’s also why monopolies are so dangerous in a capitalist economy.”

Comment

Tony Hymes writes a racy-paced piece, eminently readable, but falls over when he equates Smith’s “famous idea” of the “invisible hand” with “the market”. No such connection was made by Adam Smith in Wealth Of Nations (1776). Nor was the market involved in Smith’s other references to “an invisible hand” in his Moral Sentiments (1759), nor in his third reference to it in his History of Astronomy (1744; posthumous 1795).

So from where did Tony Hymes discover the link between Smith’s use of the metaphor and markets?

The first clue to Tony’s error is in his calling the IH “Smith’s famous idea”. It certainlly was not “famously” linked to markets while Smith was alive. I can find no traces of a reference to Smith’s “famous’ IH metaphor among Smith’s contemporaries (1723-90) who read his books and discussed his ideas.

Damn few individuals referred to it thereafter until the 1830s (1 reference) and the 1870s (5 references). But by the 20th century - around 1948 when the first editiion (of 19) of Paul Samuelson’s 5-million best-seller, “Economics: an analytical intoduction” (McGraw-Hill) linked Smith’s use of the famous metaphor to markets and these invented claims entered the public domain, first as a trickle but by 1960, as a fast flowing river. Thereafter from the 1970’s, the linkage became a veritable tsunami of references - hundreds of thousands per year in fact - in both academe and the public media.

Tony Hymes might want to know how Smith’s modest use - only 3 times in his lifetime - of a fairly common (mainly, but not entirely, theological) metaphor in the 17th and 18th centuries is so “famous” today. Clearly it had nothing to do with Adam Smith but had much to do with his post-19ht century epigones and with the epigones of those epigones.

Markets work through VISIBLE prices and cannot work without them. Nothing invisible to transactors is required for markets to work, only their visible prices.

See my essay: Gavin Kennedy: “Adam Smith and the Invisible Hand: From Metaphor to Myth”.

Gavin Kennedy: "Paul Samuelson and the Invention of the modern economics of the Invisible Hand" in History of Economic Ideas, 2010. Both available from Lost Legacy - send me your email addresss.